The worst-performing currency among emerging markets less than a year ago, the rupee has staged an impressive comeback to become a much sought-after asset for foreign investors. On Thursday, the Indian currency closed at a three-month high of 61.12 against the dollar, gaining 1.5% in just three sessions. Three-month offshore non-deliverable forward (NDF) markets are predicting less of a fall in the rupee now to just 62.31 compared with earlier forecast of a fall to 63.55.

“There are multiple factors responsible for the rupee’s rise — we have seen strong data, decent debt flows and a certain amount of positive sentiment getting built around the election outcome,” Brijen Puri, head of trading at JPMorgan Chase, said. Market participants believe the currency could gain further to at least 60 over the next three weeks as positive data and sentiment could lure in more dollars.

Foreign investors have poured in $4.85 billion so far in 2014 into Indian debt, more than 50% of the $8 billion they pulled out in 2013.High yields and favourable hedging costs have prompted foreign investors to keep buying Indian paper. The 91-day treasury bill yield is at 9.20% currently. With cost of hedging rupee assets in the preferred offshore market being around 6-7%, a foreign investor could get a return of more than 2% on rupee debt.

“I think the appreciation would not go beyond 60 in the short term,” said Ashish Parthasarthy, head of treasury at HDFC Bank. In contrast to a massive 20% fall during May-August last year to an all-time low of 68.85, the rupee has gained 12% since then.

The recent unrest in Ukraine also hit most currencies with the Russian rouble hitting its all-time low.

However, the rupee depreciated far less — only 0.5% — than its peers over the Ukraine jitters, reflecting the return of foreign investors' faith into Indian assets.

The currency had taken a beating during May-August 2013 when it had hit an all-time low of 68.85 after the US Federal Reserve indicated it would soon start unwinding its stimulus programme.

Data released on Wednesday showed that India's current account deficit fell to a four-year low of $4.2 billion in October-December, which is less than 1% of GDP.General elections will be conducted across the country spread over 34 days between April 7 and May 16, and exit polls predict a strong coalition led by the BJP.